Tuesday, August 21, 2007

This posting was written by Jeffrey May, Editor, CCH Trade Regulation Reporter.

The federal district court in Washington, D.C. released on August 21 a redacted version of the 93-page opinion denying the Federal Trade Commission’s motion for a preliminary injunction blocking the combination of Whole Foods Market, Inc. and Wild Oats Markets, Inc. The text of the decision will appear at CCH Trade Regulation Reporter ¶75,831.

At the outset, the court complimented the lawyers on the case for their professionalism, despite the pressures of the fast track schedule. The court sought to reach a decision and provide sufficient time for the losing party to appeal the decision before the consummation of the proposed merger, which is scheduled for August 31, 2007.

Relevant Product Market

The bulk of the opinion is devoted to picking apart the FTC’s proposed relevant product market. Because the court rejected the agency’s proposed relevant product market, the FTC could not meet its burden for obtaining preliminary injunctive relief.

“The FTC has not met its burden to prove that `premium natural and organic supermarkets’ is the relevant product market in this case for antitrust purposes,” the court stated. The FTC identified four premium natural and organic supermarkets--Whole Foods (the largest), Wild Oats (the second largest), Earth Fare (with 13 stores in four states) and New Seasons (with 8 stores in Oregon). According to the court, “the relevant product market within which to evaluate the proposed transaction must be at least as broad as the retail sale of food and grocery items in supermarkets.”

The court took issue with the FTC’s decision to focus on core consumers or committed customers of Whole Foods and how they might react to post-acquisition price increases. “The economic analysis and other evidence show that the proper focus is on ‘marginal’ customers,” in the court’s view.

The agency also erred “in looking to differentiation or uniqueness as the basis on which to define the product market,” according to the court. The court noted that all supermarkets differentiate themselves in order to attract customers and that they nevertheless compete vigorously with each other.

With respect to relevant geographic market, the court considered the FTC’s definition to be reasonable. However, because the agency did not properly define the relevant product market, the court didn’t examine the relevant geographic market issue closely.

Competitive Effects

The court also considered the competitive effects of the proposed merger. It discussed how major supermarket chains, such as Kroger, Publix, and Safeway, “have repositioned themselves to compete vigorously with Whole Foods and Wild Oats for the consumers’ premium natural and organic food business.”

Defenses

Potential efficiencies and flailing company defenses raised by Whole Foods and Wild Oats were considered briefly. The court concluded that the defendants failed to meet their burden on the issue of efficiencies under Section 4 of the Horizontal Merger Guidelines and failed to establish that Wild Oats was a weakened or flailing firm and that its elimination by Whole Foods would lead to a more efficient competitor.